A Closer Look at the GIPSA Final Rules

Dec 12, 2011

Today’s Legislative Preview addresses USDA’s Grain Inspection Packers and Stockyards Administration (GIPSA) issuance of final rules covering four of the five topics the agency was charged to address by the 2008 Farm Bill. One of those topics – the conditions under which a poultry contractor is provided with reasonable notice of the suspension of delivery of birds – is clearly just a poultry issue. The other three, however, could easily impact hog production contractors and growers, as well as hog producers and packers engaged in marketing contracts.

It should be noted that hardly any of the GIPSA final rules actually state what you can and cannot do. They merely list the criteria that the Secretary of Agriculture can consider in deciding whether a practice is a violation of the Packers and Stockyards Act (PSA) of 1920, but there is no guidance regarding the “acceptable” manner of addressing the criteria.

Further, the final rule does not specify exactly which part of the PSA the various actions would violate. We believe they would virtually all be considered violations of PSA’s Section 202 – prohibition of unfair practices. But it doesn’t really say that anywhere that we can find.

The Final Rule, which can be found at http://www.gipsa.usda.gov/fedreg.html[2] by clicking on “Implementation of Regulations Required Under Title XI of the . . .,” specified that the criteria regarding the fairness of a required additional capital investment during the life of a contract would apply to any requirement of $12,500 or more per building. The proposed rule said $25,000, but did not have the “per building” caveat. That level of investment still appears pretty low, even on a per building basis. The definition, though, does contain an explicit exception for costs of maintenance and repair, apparently limiting the criteria to true improvements and allowing contractors to insist that buildings be kept in good condition.

Given that these fights over additional capital investments have been mainly a poultry issue, I don’t foresee many problems for swine contractors or growers. The list of criteria strikes me as being reasonable and covering subjects that swine contractors and growers have historically been able to work out.

The section on providing a reasonable time for a grower or producer to remedy a breach of contract is a vast improvement over the proposed rule, but it is not without its flaws. It specifically says that the criteria do not apply in a situation where food safety or animal welfare is at risk. The final rule did not, however, recognize an environmental emergency as an exception to the criteria, thus it did not address a point that was raised repeatedly by pork producers. The criteria include whether a written notice had been given, plus some specific items that the notice must contain, including what happened, when it happened, how the breach can be remedied and a reasonable time period for remedy. None of those items seem particularly burdensome, especially with the implied ability to move quickly to protect animals and food safety.

Finally, the section regarding clauses that require arbitration to settle contract disputes is pretty much old hat to swine contractors, since GIPSA has been enforcing the essence of the proposed rule for nearly three years.

The arbitration section requires contracts to provide growers/producers a right to decline required arbitration in “bold and conspicuous print” on the signature page. One important difference between the final and proposed rule is that the lack of a statement regarding the right to decline required arbitration no longer voids the entire contract. The default for no statement is now no required arbitration.

In addition, the arbitration section says the secretary can consider the following:

· Whether the contract discloses (again in bold, conspicuous print) all arbitration costs to be paid by the grower and contractor and any limitations on legal rights and remedies;

· Whether the costs and time requirements of the arbitration process are reasonable;

· Whether the grower or producer can get access to information held by the contractor or packer; and

· Whether a written opinion is required to be provided to the parties.

What does all of this mean? Primarily, it means that you have a few more things to worry about if you use production or marketing contracts in your business.

If you are a contractor or packer, you need to make sure you have a reasonable response to all of the criteria listed in the GIPSA final rule. If you are a grower or producer selling through a marketing contract, the criteria provide you some recourse for perhaps making a case under the PSA if, at some point, you feel you have been wronged by the other party to your contract.

Perhaps the most important items are those that are not listed in the final rules, such as all of the proposed rules regarding conditions that constitute factors that might be considered in deciding if a practice or action is unfair or unjustly discriminatory. That was the fifth item that the farm bill charged GIPSA with; all of the regulations on the topic have been put on hold. Furthermore, the agricultural appropriations bill passed in November prohibits USDA from spending any money on finalizing those rules. It appears they are in limbo at the moment, but their supporters are still in power. Everyone will be watching carefully to see if what is now presumed dead remains so.